Question

If interest rate parity holds and the annual Taiwan nominal interest rate is 7% and the US. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Taiwan is about than in the U.S. O 1 % lower O 2% lower O 2% higher O 1 % higher

Answer 1

Answer:

2% higher

Explanation:

Nominal rate = real rate + inflation

In the U.S:

$5\%=2\%+inflation\\inflation = 3\%$

In Taiwan:

$7\%=2\%+inflation\\inflation = 5\%$

The difference between inflations is:

$I_T - I_{US} = 5\%-3\% = 2\%$

Therefore, then inflation in Taiwan is about 2% higher than in the U.S.